A rare feast

Veteran value manager Yacktman is dining on bear meat

CHICAGO (CBS.MW) - As the expression goes, sometimes you eat the bear and sometimes the bear eats you.

Don Yacktman has been feasting on the very grizzly that's ravaged investors - and he hasn't been doing it by shorting stocks.

You might think the top large-company mutual fund during this bear market would be Rydex Ursa
RYURX, -0.23%
a short-selling index fund designed to perform inversely to the S&P 500 index.

Yet the Yacktman Fund
YACKX, +0.13%
which invests in large-cap stocks, is up 19.1 percent annualized in the three years ended Feb. 28, vs. 16.3 percent for Rydex Ursa. Most notably, its manager achieved this distinction with long positions and a portfolio carrying roughly a third less risk than the market overall.

The result is sweet vindication for manager Yacktman, 61, a veteran value investor whose price-conscious, long-term discipline was vilified when technology stocks ruled in the latter half of the 1990s.

"We are not speculators," Yacktman says. He looks for cheaply priced businesses with high return on tangible assets, run by management that uses cash flow to grow operations, make shrewd acquisitions and buy back shares. Capital-intensive industries such as autos and airlines need not apply. Adds Yacktman, "Asset-intensive and cyclical companies are vulnerable."

Trouble defined this fund between 1997 and 1999, when it lost 1 percent against a 107.5 percent surge for the S&P 500. "Our batting average was below normal," Yacktman says with obvious understatement.

Taking aim

But for three years running, Yacktman has been eating the bear for breakfast, lunch and dinner. This concentrated fund gained 13.5 percent in 2000, 19.5 percent the following year, and 11.4 percent in 2002, when it landed in the top 1 percent of its peers.

Big drivers for the fund over that period include: Philip Morris, more than doubling in value during 2000; Dentsply, up 29 percent in 2001, specialty foods distributor Lancaster Colony
LANC, +0.78%
another 29 percent gainer that year, and Department 56, which rose 50 percent in 2002.

While Lancaster Colony remains a top position, Altria is down to 1 percent from about 10 percent at the end of 2000, and Dentsply and Department 56 are no longer portfolio holdings.

Yet Yacktman continues to fill the fund with controversy. His top interest currently is Tyco International
TYC, +74.50%
the torpedoed conglomerate that Yacktman insists has been punished enough. "You only get a few a year like this," he says gleefully. Roughly 8 percent of this $385 million fund is committed to Tyco, which Yacktman says is attractive for its cash flow from operations, new management, and return on tangible assets.

"We take big positions where we feel the risk-reward is extremely slanted in our favor." Yacktman started buying Tyco last summer and has an average cost of $11.61 on the shares, which now trade at $14.83. "This is not an Enron or WorldCom."

Still, the beaten companies Yacktman owns can stay down for a long time. That's okay, says Yacktman. He'll wait. "In this business, you have to have an iron will," he observes.

With Liberty Media
L, +0.64%
Yacktman figures that investors eventually will realize that cable and media pioneer John Malone deserves support again. Besides Liberty's cable television operation, it has stakes in media companies such as AOL Time Warner and non-publicly traded entities. Yacktman began buying this package of assets last summer and has paid an average of $8 a share. The stock - the fund's second-largest position at 7.4 percent of assets - closed on Monday at $9.31.

If media wasn't dicey enough, Yacktman also has loaded the fund with Qwest Communications bonds that yield 7.9 percent and mature in August 2010. Unless the battered telecom goes belly-up in the next seven years, Yacktman is convinced that he got a steal when he scooped up this paper last summer at 48 cents on the dollar. Almost 6 percent of the fund is riding on the investment. "You're buying a retail telephone business at about half the value of Verizon, SBC or BellSouth," he says. "At these prices they're giving it away."

In season

Yacktman is basking again, but he and his shareholders have seen a colder side. The painful experience of a few years ago gives him pause, as does the fact that he's completing his 35th year in the investment business. Though he says he doesn't plan to retire anytime soon, Yacktman recently named his 33-year-old son Stephen to co-manage both Yacktman fund and more concentrated Yacktman Focus
YAFFX, +0.05%
"He has fire in the belly," says the father about his son, who joined the firm a decade ago.

Shareholders will have to watch carefully that the apple doesn't fall far from the tree. But while Yacktman allows himself to brag about his offspring, he's much more modest about his own stock-picking ability.

"A good value investor is always wrong," Yacktman says. "You never buy at the bottom; you never sell at the top. It's just a matter of degree of how wrong you're going to be"

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.